Concluding remaks

When I was 27 years old, I had the chance to work with the team that had taken Dell Computers international. In 1987, a 22 year old Michael Dell opened a Dell office in England. Andrew Harris headed the international operation and brought in a good friend, Martin Slagter, to run the UK and European operations.

By 1992, Dell’s sales had grown to $2 billion, from $60 million six years earlier. However, 1992 proved a critical year for the company.

A series of crises led to the company posting its first quarterly loss.

Dell brought in new management and both Harris and Slagter left the company in 1993. They left with stock options that they cashed in making them both multi-millionaires; they used their cash to start an exciting new venture in the UK and US, Hand Technologies.

Hand Tech was at the cutting edge when I joined it in 1995. They were leveraging on something new – the Internet – to sell computers

that people in each community would already be going to for advice on what PC to buy. Through Harris and Slagter’s industry contacts, they had deals with Microsoft, Compaq, HP and Apple to sell their PC’s online long before these giants were doing so themselves.

I became the General Manager for the UK and we quickly grew to employ over 1,000 reps in the first year. The team was intent on learning from the management mistakes that they had seen Dell make. We assembled a seasoned board of advisors, invested in cutting-edge systems, implemented tight financial controls. But somehow there seemed to be something missing…

While we were leveraging like crazy – on our vendors, our reps, the Internet – and appeared to be clocking some impressive growth, we did not have the kind of attraction that Dell had. After the first twelve months it seemed we still had to work just as hard to sell the next PC or recruit the next rep, even though we were over ten times bigger – and we were still a long way from making any money.

Slagter and I began to focus at our core value proposition: why weren’t customers beating a path to our door? Our vendor margins and rep commissions didn’t let us sell at Dell’s prices. The service we promised from our reps we couldn’t control. The reliability from our vendors – despite them being brand names - we couldn’t guarantee.

Meanwhile Harris, based in Austin, kept focused on greater leverage, saying, “The profits will come when we reach critical mass. The critical mass will come once we’ve built our brand.”

From 1995 to 1997, with money from two successful rounds of funding fueling our growth, we grew to over 10,000 reps selling from the Hand Technologies website. But the cost of acquiring each new rep and each new sale seemed to be going up, not down. Meanwhile, Dell – even with its ongoing management and production problems - had grown from $2.9m in sales in 1993 to an astounding $12.3b in 1997, and it had been profitable in every quarter.

Whilst we could dismiss a phenomenon whereby lottery winners were losing their fortunes and put it down to carelessness, here was a far more baffling situation. From all accounts, Dell was continuing to have management and production issues, while we seemed to have

a well-functioning team. Yet Dell continued to grow and attract new business at a phenomenal rate, and we had to fight for every penny.

Why is it that we all know of some businesses that seem to be run so well – with great management, nice systems, happy customers – and yet they still lose money? Why is it that we also know of businesses that seem to have one issue after another, yet more customers and more money keep flowing through the door at a dizzying rate?

In early 1997 we held a strategic meeting in Austin (which is also home to Dell’s headquarters). Slagter returned from a visit to the local drycleaners visibly distressed. He had met a Dell staff member who he had hired years earlier who had told him what his current stock options in Dell were worth. Slagter did his sums on the trip back to the office, saying “If I had sat on a beach with my Dell stock options instead of starting Hand Tech, I’d be twenty times richer today.”

To rub salt in the wound, Dell had finally ‘discovered’ the Internet months earlier, allowing customers to configure and buy their custom-made PC online. Sales quickly grew to $1 million a day, eclipsing the results we were achieving. While we were still struggling to fill our muddy pond with buckets of water, Dell had come by and with one simple gesture carved $1m-a-day of extra width into his wild, raging river.

I left the company in 1997 and traveled to Asia to start my next venture and Hand went the way of so many dotcoms, succumbing to the Wealth Paradox and closing shop in 2000, out of cash and out of luck. Meanwhile, Michael Dell has gone on to weather all manner of set-backs – many far larger than the ones we faced – and ended up fourth on the 2005 Forbes 400 with a net worth of $18 billion and a company which is now the world’s largest PC manufacturer.

What set the two approaches apart? While we were busy focusing on the hundreds of tasks in our business, Michael Dell kept focused on one – perfecting his direct model. The value of his low price, fast delivery, and reliable service model attracted an ever-increasing flow of customers and cash that gave him the resources to get things right in all other areas of his business – in good times and bad.

Our plan, team, systems and financing counted for nothing if none of us were focused on playing the game of creating value, and leveraging. During those painful years, while Dell was busy playing his game, we never even found the pitch.

Every successful Wealth Creator has kept focus on playing their game: focusing on creating value, and then leveraging. This is what creates the money flow. This is the Wealth Equation.

THE WEALTH EQUATION

Wealth creation is not about making money. It is about creating flow.

The Wealth Equation explains the plumbing:

WEALTH = VALUE x LEVERAGE

Money flow follows the same principles as water flow in a river. The two variables of the river that will determine the water flow at any particular section are the height and the width (or more accurately the area of its cross section - width x depth). Similarly, the two comparable variables that make up wealth and that will determine your money flow are value and leverage. Here’s why:

VALUE

Water will always flow from high ground to low ground and always in that direction. The height differential will determine the speed of water flow at any one time. If you double the height of the river, you double the speed of water flow.

Similarly, money will always flow where there is a value differential, and always from high value to low value. Imagine I decide to sell my watch for $1,000. That means I don’t value it as much as $1,000. You decide to buy it for $1,000. That means you value it more than the money. As a result, your money flows from you to me. You get my watch and I get your money. If a buyer and seller chose a watch of double the value, then $2,000 would have flowed. Double the value and you double the money flow.

LEVERAGE

Value on its own does not make the river. A river also needs width. In the 1980’s, Bill Gates did not have the most valuable software, but he was better at leveraging it. While Steve Jobs at Apple was coming up with innovation after innovation in his software (Apple introduced the mouse and graphic user interface before Microsoft switched from MS-DOS to windows), Gates was encouraging the growth of the entire PC market to distribute his software.

While Jobs insisted that Apple software could only be used on Apple computers, Gates positioned Microsoft as a software company serving all PC’s with a common operating system and software platform. As a result, the entire PC industry grew by leveraging on his products, and he could focus all his efforts on developing his software, while Jobs was diluting his efforts by trying to develop and own the software, the hardware and the distribution channel simultaneously.

Where value gives the river a gradient, leverage gives the river width.

Where value determines the speed of money flow, leverage determines the volume of flow at that speed. In the 1980’s while Jobs was trying to create an Angel Falls, Gates had carved a Mississippi.

By 1985, Jobs had lost his place at Apple - ejected from the company he started by his own board members. Apple’s market share plummeted in the following years from over 50% to 5%. Gates, in 1986, took Microsoft public giving him an instant $236m fortune.

(Jobs made a comeback when he changed his leverage strategy, building a billion dollar fortune in the following thirty years.)